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Garmin Blows Past Estimates - Analyst Blog

Garmin Ltd
. (
GRMN
) reported quarter earnings that beat the Zacks Consensus Estimates
by 20 cents, or 30.5%. Currency had an 11 cent negative impact on
earnings, and if excluded would have raised the EPS by a like
amount. Revenue exceeded the consensus by 18.1%.

Garmin is deferring lifetime maps, connected services and
premium traffic over their economic lives. Net deferrals were 26
cents a share in the last quarter.

Revenue

Garmin's fourth-quarter revenue of $909.6 million was up 36.4%
sequentially and 8.6% year over year, helped by positive
seasonality that pushed up sales of both personal navigation
devices (PNDs) and outdoor/fitness products.

Volumes were up 75.2%, just past the levels in the year-ago
quarter. However, the blended average selling price ("ASP") dropped
22.2% sequentially while increasing 7.7% from last year, due to a
higher mix of PND business.

North America is clearly the market driving Garmin's fortunes,
since the region accounts for over half its revenue. While
seasonality is witnessed across all its served markets, it is the
most pronounced in this region.

Garmin stated that revenue growth in the last quarter was flat
to up sequentially across all geographies. For the year, the EMEA
region was up 19% and the Asia/Pacific up 13%, partially offset by
a 7% decline in North America.

The performance in North America remains weak due to the secular
decline in PNDs that Garmin has not been able to offset through
in-dash applications. The improved performance in Europe was helped
by the Navigon acquisition and market share gains. Asia remains a
growth market.

Revenue by Segment

Garmin changed its segment presentation beginning in the first
quarter of 2011, splitting its Outdoor/Fitness segment into the
Outdoor and Fitness segments. The rest of the segments are being
presented as before. Accordingly, the Auto/Mobile, Aviation,
Outdoor, Fitness and Marine segments generated 64%, 8%, 13%, 10%
and 5% of fourth quarter revenue, respectively.

Seasonality typically makes for significant variation in
quarterly revenue, with the most significant increase in the
December quarter, followed by the most significant decline in the
March quarter.

The
Auto/Mobile
segment was up 50.8% sequentially and 3.6% year over year. Volumes
were up sequentially, but from a year ago. However, pricing was
stronger than the fourth quarter of 2010. The PND business has been
severely hindered by the availability of PND substitutes -
primarily smartphones from the likes of
Apple Inc
(
AAPL
),
Research In Motion
(
RIMM
) and others running on
Google Inc
's
GOOG
) Android OS - as well as some aggressive pricing from competitors,
such as TomTom.

Garmin remains the number one supplier in the U.S. (60% share)
and one of the largest suppliers in EMEA (30% share), but this
position is not likely to help given the poor market conditions.
The primary focus areas are currently automotive OEMs (for in-dash
applications) and emerging markets.

The
Aviation
segment revenue was flattish sequentially and up 3.6% year over
year. The aviation market continues to lag the overall economy in
terms of recovery from the recession, but Garmin appears to have
outperformed the market, given its new wins, penetration into the
helicopter segment and focus on theretrofit market.

Management stated that the retrofit business again drove
sequential increases in the last quarter, although it was offset by
weakness in business jets. New products and stronger business from
OEMs contributed to the increase in aviation revenues.

The
Outdoor
segment was up 27.8% sequentially and 35.2% year over year. Pent-up
demand for new products, expansion into new categories and
contribution from acquisitions were the main reasons for the growth
in the last quarter. Garmin also saw market share gains in the
GPS-enabled golf market.

The
Fitness
segment was up 37.3% sequentially and 17.0% year over year. The
company continues to launch a host of products for both elite
and recreational customers and recently refreshed the Forerunner
product line. Seasonality impacted sequential performance, while
growth from last year was the result of the many new products that
Garmin continues to introduce in the category.

The important drivers in the segment remain the relatively
high-end Forerunner and Edge line of products, which is a good
thing even as far as margins are concerned. GPS-enabled running and
cylcling products are gaining popularity all over the world, which
was good news for Garmin, the market leader in the segment.

The
Marine
segment was down 10.0% sequentially and up 16.4% year over year.
The solid growth from the year-ago quarter was the result of
improving market conditions and share gains. The sequential decline
was attributable to typical seasonalilty.

Garmin's strategy here has been the building of a solid
portfolio of products and strengthening strategic relationships
with marine OEMs. This strategy is paying off, with the segment
showing small but steady growth over the years.

Gross Margin

Gross margin for the quarter was 47.7%, down 394 basis points
(bps) sequentially and up 235 bps year over year. ASP increases
offset the volume decline, accounting for the increase from the
year-ago quarter. However, the sequential performance suffered, as
the company sold a large volume of lower-ASP products. Warranty
adjustments impacted the year-over-year comparison.

The operating expenses of $233.7 million were up 18.6% from the
previous quarter's $197.0 million and up 19.8% from $195.1 million
in the year-ago quarter. The operating margin shrunk 9 bps
sequentially and 5 bps year over year to 22.0% in the last
quarter.

The sequential decline was primarily on account of the weaker
gross margin. The decline from the year-ago quarter was the net
result of lower cost of sales and higher R&D, SG&A and
advertising expenses.

On a pro forma basis, Garmin reported a net income of $165.6
million, or an 18.2% net income margin compared to $150.4 million,
or 22.5% in the previous quarter and $132.9 million or 15.9% net
income margin in the fourth quarter of last year. The fully diluted
pro forma earnings per share (
EPS
) were 85 cents, compared to 77 cents in the September 2011 quarter
and 68 cents in the comparable prior-year quarter.

There were no one-time adjustments in any of the above quarters,
so the GAAP net income was the same as the pro forma income as
discussed above.

Balance Sheet

Inventories were down 13.8% sequentially, with inventory turns
increasing from 2.8X to 4.8X. Days sales outstanding (DSOs) went
from 71 to 61. The cash and short term investments balance
decreased $63.9 million to around $1.40 billion, with the company
generating $225 million from operations.

Garmin spent around $12 million on capex, yielding a free cash
flow of around $213 million. It also spent $155.9 million on
acquisitions. Garmin has no long term debt and long term
liabilities were around $356 million at quarter-end.

2012 Guidance

Garmin provided guidance for the year. Given expectations of a
5-10% growth in the Marine segment, 5-10% growth in the Aviation
segment, 5-10% growth in the Outdoor segment, 20-25% growth in the
Fitness segment and a 7-10% decline in the Auto/Mobile segment,
Garmin is expected to see revenue of $2.7-2.8 billion for the
year.

The gross margin is expected to be flat to slightly up,
operating expenses in the $520-540 million range, operating margin
of 19-20% and a tax rate of 13% resulting in EPS of $2.45-2.60.

The Zacks Consensus for the year was $2.53, within the guided
range.

Conclusion

Garmin's strong results were helped by the many new
higher-margin products that the company has been introducing over
the last few years and the company's strategy of increasingly
targeting the OEM segment with many of its offerings. The advantage
of this strategy is more stable revenues and steadier pricing. At
the same time, it has focused on individual customers in the
outdoor and fitness segments. Given its strength in segments other
than PND, we have a long-term (3-6 months) neutral recommendation
on the shares.

The primary negative for Garmin is its still significant
exposure to the PND segment, which is on a secular decline. We
think that Garmin could ultimately improve upon the situation by
focusing on auto OEMs for in-dash solutions and by building a
presence in emerging Asian countries. However, Garmin has entered
the race a bit late, so competition will be stiff.

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